Combined Index Trader Net Position Corn, Soybeans, Wheat

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1 Weather No changes in the forecast this morning. Active showers in the eastern US over the next week, with some significant totals seen in the ECB over that timeframe. WCB areas should see limited amounts. Two week rainfall totals should run near to above normal through most of Brazil with the exception of the extreme northeast. Very big rainfall amounts could be seen in some southern areas. Argentina should see two week rainfall amounts run fairly close to normal though eastern areas will likely see below normal amounts. No major heat expected in South America, but Argentina may see highs flirt with the 9F level at times. Crops I was looking a bit at COT data yesterday, and I noticed that index traders have been fairly aggressive buyers in the agricultural space in the past couple of weeks. A 5-year chart of the combined index trader net position in corn, soybeans, and Chicago wheat is shown below, and you can see we ve seen this jump roughly 5k contracts in just the past two weeks. While not the biggest surge on the chart, it is far from insignificant and certainly explains some of the recent price strength (at times). The unanswered question is why the interest? 8, Combined Index Trader Net Position Corn, Soybeans, Wheat 75, 7, 65, 6, 55, 5, Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 One possible answer, though probably over-simplistic, is that funds are starting to move out of equities and into other markets. The price weakness and VaR models have likely forced funds to liquidate equities and some of that might be flowing into cheap assets. It doesn t seem to get much cheaper than grains these days. 1

2 My concern, however, is that without a significant fundamental story pointing towards price upside (depending on your bias I m negative to say the least) that this recent buying interest may soon turn to selling pressure. On the following page are charts showing the index trader net position of corn, soybeans, and Chicago wheat. On each chart, I also show the 1-year curve, essentially showing the roll yield for a long-only index trader. While imperfect, there is a general tendency for index trader positions to grow to their largest levels when the roll yield is not dramatic. Interestingly, the recent case in soybeans has seen a big surge in index buying while the curve continues to widen. My concern is that the buy-it-because-it-is- cheap thought process might turn expensive when it comes time to roll. And in that case, this buying will reverse course with unsurprising results. Soybean Index Trader Position vs. 1-Year Curve 25, 2, 15, 1, 5, Soybean Index Trader Soybean 1-Yr Curve Corn Index Trader Position vs. 1-Year Curve 6, 5, 4, 3, 2, 1, Corn Index Trader Corn 1-Yr Curve 2

3 Chicago Wheat Index Trader Position vs. 1-Year Curve 25, 2, 15, 1, 5, Chi. Wheat Index Trader Chi. Wheat 1-Yr Curve Also consider there isn t much that points towards interest in commodities as an asset class either. The chart below shows the Bloomberg Commodity index is sitting in the middle of the range it has held now for years (and failed at key MAs). Also not the chart on the following page showing the darling of the commodity sector, crude oil, is now flirting with negative roll yields for the first time since summer 217. Might this actually spark less interest in commodities as an asset class rather than more? 3

4 Crude Oil -One Year Curve /31/216 11/3/216 12/31/216 1/31/217 2/28/217 3/31/217 4/3/217 5/31/217 6/3/217 7/31/217 8/31/217 9/3/217 1/31/217 11/3/217 12/31/217 1/31/218 2/28/218 3/31/218 4/3/218 5/31/218 6/3/218 7/31/218 8/31/218 9/3/218 Brent WTI Remember cheap can always get cheaper. Thoughts appreciated. Livestock Last week s big cash rally produced a pretty sizeable basis adjustment December Live Cattle Basis History Days Until Expiration

5 We could perhaps make an argument that basis is still a bit wider than normal, but generally I think we re pretty close to the mark for this timeframe. So, IF cash is going to trade $1-2 (or more) higher this week like most seem to believe, it is interesting to see the board trading so sluggish out of the gates. The 116 level in LCZ certainly looks like an interesting spot to watch here. We ve seen volume surge since breaking-out above that level which would leave late-to-the-party longs potentially vulnerable for a washout below. It appears to be a solid spot of support, and if we assume everyone is correct on their higher cash call it probably should hold. Still, expect to find stops below that level if it gets tested. It sounded like some rumors of very small 114 trade took place yesterday in the north. Definitely not the strength some have been expecting, but I haven t seen anything official either. Financials October has clearly been a difficult month for US (and global) equities, but things for now appear to be ending on a solid note. The 26 area on the SPX, coinciding with the lows seen earlier this year, appears to be a solid area of support for the market. We have to keep in mind that the underlying fundamental factors supporting US equities haven t truly changed yet. US Q3 GDP was +3.5% which is slower than the 4.2% seen in Q2 but still very strong compared to the structural growth rate. While interest rates continue to creep up and influence highly rate-sensitive portions of the market (housing, autos) the remainder of the economy appears to be booming. Consumer confidence hit a new high as reported yesterday. Inflation figures are not alarming at this point. A tight labor market should eventually lead to higher wages and higher inflation but we ve been saying that seemingly forever now. I actually think the biggest short-term risk to the market right now is midterm elections next week. Next Tuesday could be a wildly volatile day/night as results are tallied. On the following page I ve included RCP s maps of the Senate and House races. This is definitely going to come down to the wire, and there will be big market reactions. 5

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7 The dollar is higher this morning, but only modestly so. Interesting data out of Europe overnight, with relatively strong headline inflation of 2.2% but core inflation of only 1.1%. Remember the ECB s inflation target is close to but not more than 2%, which we seem to have reached on a headline basis but core continues to lag. It makes the ECB calculus on monetary decisions a bit more uncomfortable as well. On one hand the GDP numbers reported earlier in the week showed very clear signs of slowing economic growth, implying they need to maintain loose policy. On the other hand headline inflation has reached their target and, for now, ECB staff projections call for further gains in 219. It raises some questions about how aggressive they might be in normalizing policy, but I wonder if the more important question is whether they want to fall so far behind US monetary policy? The rate differential between the US and Europe is astronomical right now. The chart to the immediate right shows the spread between US and German 2yr yields. To the best of my knowledge, this has never been wider. Europe might not want to quickly normalize policy, but it also might not want to see this divergence grow even wider as it would seem to me that could create some problems. On tap today we have the ADP employment report. Expectations call for an increase of 187k, which would seemingly be on par with what we ve experienced now for quite some time. Earnings releases are due today from companies including BG, YUM, and GM. Energy On tap today we have the EIA inventory release. Expectations are for today s report to show a build of 3.2 mil barrels. Yesterday s API release was slightly larger with a 5.7 mil barrel build noted. Both gasoline and distillate inventories are expected to decline, and that was the case with the API numbers as well. The Russian s have apparently followed-suit on oil production increases. Unofficially, some reports suggest production in October will be mbpd which would be a new post-soviet production record. September 7

8 production was officially estimated at mbpd and the official number for October could be released as soon as Friday. Crude oil bulls will be happy to see the month of October in the rearview mirror. WTI futures are down roughly 8% on the month and, as shown below, are posting their worst monthly performance since July 216. Despite the sizeable build in inventories reported by API yesterday afternoon, crude oil futures are higher at the time of writing this morning as they benefit from a newly restored risk-on sentiment. Today s Calendar (all times Central) ADP Employment - 7:15am Chicago PMI 8:45am EIA Petroleum Inventories 9:3am Thanks for reading. David Zelinski dzelinski@nesvick.com Trillian IM: dzelinski@nesvick.com Bloomberg IB: dzelinski2@bloomberg.net DISCLAIMER: This communication is a solicitation for entering into derivatives transactions. It is for clients, affiliates, and associates of Nesvick Trading Group, LLC only. The information contained herein has been taken from trade and 8

9 statistical services and other sources we believe are reliable. Opinions expressed reflect judgments at this date and are subject to change without notice. These materials represent the opinions and viewpoints of the author and do not necessarily reflect the opinions or trading strategies of Nesvick Trading Group LLC and its subsidiaries. Nesvick Trading Group, LLC does not guarantee that such information is accurate or complete and it should not be relied upon as such. Officers, employees, and affiliates of Nesvick Trading Group, LLC may or may not, from time to time, have long or short positions in, and buy or sell, the securities and derivatives (for their own account or others), if any, referred to in this commentary. There is risk of loss in trading futures and options and it is not suitable for all investors. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RETURNS. Nesvick Trading Group LLC is not responsible for any redistribution of this material by third parties or any trading decision taken by persons not intended to view this material. 9